IRS Lien Use Doing More Harm Than Good

on 06 January 2010.

In her annual report to Congress, National Taxpayer Advocate Nina Olson recently noted that liens used by the Internal Revenue Service (IRS) as a tax enforcement strategy were ineffective and potentially did more harm than good to the taxpayer and to the agency itself.

According to Olson, lien filings by the IRS experienced a meteoric 475% increase between 1999 and 2009, jumping from 168,000 in FY 1999 to nearly 966,000 a decade later. On the other hand, over the same period, inflation-adjusted collection revenue fell by 7.4%.

Olson also noted that the automated system the IRS uses to file liens doesn't account for the taxpayer's ability to actually pay down the debt, meaning the liens only have the effect of making the taxpayer less eligible for credit and damaging their already wounded financial viability. By failing to consider the other debts owed by the taxpayer, she noted, the IRS has involuntarily lead many into long-term noncompliance.

"Any taxpayer with these debts will tell you that these creditors don't go away," Olson said. "Taxpayers are placed in the intolerable position of agreeing to pay the IRS more than they can actually afford, given their other debts, and then defaulting on the IRS payment arrangements when they channel payments to unsecured creditors in order to get some peace. Thus, the IRS itself fosters noncompliance by its failure to take a holistic approach to the taxpayerâ€™s debt situation."

Criticism of the agency came quickly from Capitol Hill. "The point of IRS restructuring and the creation of the taxpayer advocate's office itself was to restore taxpayers' rights after the IRS had engaged in heavy-handed enforcement tactics," said Senator Chuck Grassley (R-IA), ranking member of the Senate Finance Committee, whose jurisdiction includes tax policy. "I worry that the IRS is reverting to some old habits to taxpayers' detriment."

Grassley also criticized the gap between the IRS' treatment of larger firms and their treatment of smaller businesses. "There seems to be more interest at the highest levels of Treasury and the IRS in helping big banks than working with small business owners and average taxpayers," he said. "The placement of liens on the little guys shouldn't be automatic and computer-generated while the big banks get the benefit of agency discretion and concern in the executive offices. One, it's unfair, and two, it's bad for the economy. Small businesses create 70% of all net new jobs."